“Investors should prepare for a cascade of change in the character of the financial markets,” cautions James Paulsen, an economist and strategist at Wells Capital Markets.

It’s already under way. Repositioning for inflation explains much of the recent stock market turbulence, because some investors get it.

To be clear, Paulsen is not predicting runaway inflation. But even persistent higher inflation will rock investor mentality, because a lot of money managers just aren’t expecting it. I know this from talking with investors on a daily basis. But you can also tell because the yield gap between 10-year U.S. Treasury bills and inflation-protected treasuries (TIPS) is relatively narrow. If investors were expecting lots of inflation, they’d be selling bonds, which would raise those yields compared with returns on TIPS.

Here are five reasons why investors have it wrong about inflation. After that, we’ll look at how you should position now — including several stocks to buy and things to avoid — to prepare for the inflation-induced cascade of change to come.

Reason 1: Investors are looking at the wrong inflation

Some basics: There’s “headline” inflation, and there’s “core” inflation. Headline inflation includes food and energy. Core excludes them because they are volatile. Lots of investors are focused on the headline Consumer Price Index (CPI), which looks relatively tame at 1.4%, since it’s pushed down by weak oil and commodities.

But this is where investors go wrong. Because core inflation matters, and it’s ramping up. Core CPI recently hit 2.2%, just about the highest level during this economic recovery. That’s a lot higher than headline inflation of 0.4%.

But oil is rising, and it will probably continue to do so. So are commodity prices, which could push food prices higher. By the end of the year, all of this could push headline inflation — the measure that’s currently lulling investors — up to 3%, says Paulsen.

“All of the sudden, headline inflation is higher than core inflation, and that is going to be huge,” he says.

Reason 2: Bernie Sanders may be a nice guy, but he’s wrong about wages

Because there’s a presidential election, we hear a lot these days from Bernie Sanders and others about wages being stagnant for years. Sorry, Bernie, but this is just plain wrong.

Wages have been going up throughout the recovery, and indeed since the mid-1990s, says Paulsen. But pay growth accelerated last year. Median wage growth calculated by the Federal Reserve Bank of Atlanta rose 3% over the past year, points out Robert W. Baird investment strategist William Delwiche. That makes sense, because the number of jobs available has been going up. So employers have to pay more to hire workers.

This wage growth will bleed through to prices as consumers buy more and companies raise prices to pay workers more.

Reason 3: Investors are fooled by sluggish growth

A lot of the time, inflation is associated with raging growth. So investors question how we could have inflation with just 2.5% GDP growth. The answer: It’s not really the overall rate of growth that matters. What matters more is whether supply is tight. That’s what we have now in the labor market with unemployment below 5%. This means wages can heat up even more, causing more inflation.

Sure, there was a big pool of “discouraged” workers. But people outside of the work force have been coming back in droves since September, upping the labor participation rate. So far, this has covered a lot of the demand. But those days are about over, according to an analysis of the sources of these new workers by Goldman Sachs economist David Mericle.

“The sources of workers, like retired, may have given up as much as they can,” he says. Mericle predicts the job market participation rate will actually decline. That will make the labor market even tighter.

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